Paying up in Pakistan

25/09/2015

By Sanjana Sunnak

Only 500,000 Pakistanis filed a tax return and paid income tax last year. This is disastrous for the economy. With no sustainable revenue, public debt is spiralling out of control. Despite a robust and thriving private sector, Pakistan is still one of the world’s poorest countries; 30% of children are chronically malnourished.

Almost half of government revenue is used to pay debt, which leaves little left for development. Pakistan needs to get better at collecting taxes.

Why do so few people pay tax? A public survey by Adam Smith International reveals serious public grievances: people think their money will be misused, or that they should not pay taxes when elites, including politicians, dodge payment. The current tax system is complex, non-transparent and inefficient. Put simply, many people avoid paying tax because the system allows it; others feel they are already taxed a lot on things like fuel and electricity.

The good news is people are willing to pay; but not to a flawed system. The bad news is reform efforts have either failed, or been short-lived. Political blockages have slowed down reform efforts and people are disengaged and frustrated.

There needs to be greater public demand for a better, more equitable tax system. Advocacy group Research and Advocacy for the Advancement of Allied Reforms (Raftaar) has launched its first campaign that alerts Pakistanis to their role in solving the tax crisis. It engages the public by explaining the linkages between revenue collection and service delivery. Through increased public awareness and advocacy from policy-makers, the group is pushing the government to be accountable for increasing revenue and providing services.

The group, funded by the UK’s department for international development and facilitated by Adam Smith International, is advocating for a series of reforms. Currently, there are formal loopholes which allow tax exemptions in certain sectors; this is often politically motivated and leads to significant revenue losses.

Raftaar is lobbying for parliamentarians to lead by example and publicly pledge to comply with their tax obligations and reduce unnecessary tax exemptions. It is also putting pressure on the government to remove duties on basic foods items, like wheat and rice. Reducing the price of such items will help lower the prevalence of chronic malnutrition. This is the kind of sustainable development Pakistan needs.

To carry out these reforms, the government also needs to improve its legislative, policy and administrative capacity, at both the Federal and provincial level. Provincial reform is essential since revenue collection is decentralised and provinces have a mandate to collect more taxes, namely sales tax on services.

Pakistan’s economy depends on it. Its public debt has increased nearly threefold in seven years and public services are severely lacking. Unless equitable and transparent tax collection is prioritised, development will never be sustainable.